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EURUSD Looks to Break Out

The Forex markets have been, generally speaking, non-trending, lacking volatility, AND lacking conviction for most of 2014. Of course there are some currency pairs that are the exceptions to the rule. However, generally speaking, it has been quiet year so far.

Why Does This Occur?

In currency trading, it is about winners and losers. When one country is winning–that is, it has a strong economy–their currency should appreciate. When a currency appreciates it makes the exports of that country more expensive abroad, slowing down the export portion of GDP. It also helps to lower the cost of imports and this has a taming effect on inflation.

When a country is experiencing a weak economy, their currency tends to depreciate or get weaker. When a currency depreciates, it makes their exports cheaper abroad, and at the same time increases the cost of imports. This can increase inflation and/or make domestic goods more competitive versus imported goods, helping to boost economic activity.

Central Bank Policy is also an influence on a currency. If a country is easing or likely to keep rates unchanged for an extended period of time, while another country is talking about tightening (or the market perceives they will be tightening), it too can lead to more trending markets with the country who is raising rates (or more likely to raise rates) being the one with the strong currency.

In June, the ECB eased via a number of measures, including lowering interest rates, and announcing a program whereby they will provide cheap money to banks with the hope that they are using those funds to increase lending. The program is known by the acronym, TLTRO for Targeted Long-Term Refinancing Operation.

Meanwhile, in the US, the Fed has been on a course of taking out stimulus as employment gets stronger and the economy shows signs of improvement. Granted, they are still buying bonds through Quantitative Easing (or QE) but they are moving toward a debt market and economy not supported by Fed buying.

One would have expected that such a scenario would lead to a weaker EURUSD

What Happened?

The EURUSD since the June easing by the ECB has moved up, moved down, moved up again, and is now back down (see chart). The activity is non-trending. There has been no conviction. It might be because of the World Cup. It might be the summer doldrums. It might be less liquidity and risk appetite due to increased regulation.

Since July 1, however, there has been another move lower in the EURUSD. In currency trading on July 16, the low reached 1.3520. The two-month low is 1.3502. The low for the year from back in early February is 1.3476 (not shown in the chart).

The pair which has been non-trending over 2014–and especially over the last two months–is on the verge of breaking out below the recent lows. The technical move is also supported by the fundamentals of a weaker EU economy, and stronger US economy, and a more dovish ECB and more hawking (well, less dovish) US Federal Reserve.

All the ingredients are there for a break to new lows in the EURUSD. The last piece of the puzzle is for the market liquidity to push the price down and through the support at 1.3502 and then the low at 1.3476. If done, I would expect that the EURUSD might look to trend lower over both the near and intermediate term (toward 1.3300 if momentum can be maintained).

Be aware.

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